Steelmakers warn of weak outlooks

By IBT Staff Reporter On 07/26/11 AT 5:40 PM

Many of the world's leading steelmakers warn that profits in the second half of this year will be hurt because of the slow economic recovery, along with lower steel prices and higher raw material costs.

Two American steel producers, AK Steel Holding Corp and U.S. Steel Corp , gave dismal outlooks following similar alarm bells last week by Nucor Corp and South Korea's POSCO <005490.KS>, the world's No. 3 steelmaker.

And the industry's eyes will be on Europe on Wednesday when ArcelorMittal , the world's largest producer, reports second-quarter results.

According to a Reuters survey, ArcelorMittal is expected to report a 26 percent rise in EBITDA, or earnings before interest, taxes, depreciation and amortization, from the first quarter. But that core profit is expected to drop by 19 percent in the third quarter, the poll shows.

The carbon (steel) market is suppressed; we're seeing numbers here that I don't think many people can sell at and make a profit at, AK Steel's Chairman and Chief Executive Officer James Wainscott told Wall Street analysts on Tuesday.

We continued to experience much higher iron ore prices than we had expected at the beginning of this year and ... it appears that these higher iron ore prices will continue in the second half of 2011, he said on a conference call.

High prices of iron ore and coking coal, which rose between 25 and 47 percent quarter on quarter in April-June, show no signs of retreating, analysts say.

AK Steel reported second-quarter profit that missed Wall Street expectations and said third-quarter operating profit would be down from the second quarter.

U.S. Steel reported a lower-than-expected second-quarter profit late on Monday and also warned that earnings would fall in the current quarter.

Last week, Nucor, the biggest U.S. steelmaker, said results in the current quarter would be lower because of pricing pressure and sluggish demand in some industrial sectors.

AK Steel shares dropped 17 percent to $12.86 in afternoon trade on the New York Stock Exchange and U.S. Steel was off 8.7 percent at $40.41. Nucor fell 2.3 percent to $39.78 and ArcelorMittal's U.S.-traded shares were down 1.2 percent at $32.27.

The results were terrible, especially AK's, said analyst Charles Bradford of Bradford Research in New York. Their third-quarter outlook was so bad it's not much better than break-even.

He said although the third quarter is traditionally slow, weak demand from some industrial sectors like construction will be exacerbated by too much steel in the marketplace.

After the recession, most steelmakers cut back production; they have been slowly inching up capacity as demand warrants.

But Bradford said steel prices have come down recently since the reopening of the huge Sparrows Point plant in Maryland, which added more steel to the marketplace. The plant's new owner is RG Steel, an affiliate of Renco Group.

Too much capacity has come on line, Bradford said.

Nucor said last week that steel prices were being battered also by imports.

But we do believe investors had not built much faith in second-half 2011 expectations, given the recent declines in flat-rolled pricing realizations and choppy macro data, Parr wrote in a research note.

In U.S. Steel's earnings release, Chief Executive John Surma warned that the United States and Europe continue to face an uneven economic recovery.

The continuing fiscal uncertainty ... is not helping the situation, he said in a statement. Reflecting the effects of a slowing economy, we expect to report an overall lower operating profit in the third quarter.

AK Steel said its average per-ton selling price was likely to fall by about 1 percent in the third quarter from the second quarter. Combined with higher costs, this is likely to result in an operating profit of about $15 per ton in the quarter, down from $46 in the second quarter, it said.

POSCO warned last Friday of weakening demand growth and persistently high input costs in the second half, after posting a 17 percent fall in quarterly operating profit.

Steelmakers' earnings are set to be further squeezed as record production in China floods the market when demand is under pressure from tightening monetary policy in China and debt problems in Europe and the United States.